You have a startup and you’re looking for an investor. The question you are probably asking is: among different types of investors, which one best suits you?
I can’t tell you that because I don’t know what you do. What I can tell you is that not all investors are the same, both in terms of how (and when) they invest and what they expect in return. But that shouldn’t be much of a worry, right? After all, money is money – does it matter where it comes from?
It does and if this answer surprised you, then you best pay close attention for the next four to five minutes (one and a half if you’re a speed reader).
In no particular order:
Personal investors – F&F (Friends and Family)
Thought of as one of the most direct ways to get a new company started, personal investors consist of friends, family members, and close acquaintances with means who are relatively easy to convince to invest. After all, it’s only natural to depend on and help those closest to you so it’s easy to see how this might be the first step a startup takes toward funding.
Because of the sensitive nature of involvement, these close ties should be formalized by legal precautions to safely withstand the pressures of doing business and avoid any complications. Do note that there is a limit to how much funding this type of investor can provide and it’s almost guaranteed it will not be enough.
Typically wealthy individuals who want to invest in projects they are passionate about, angel investors are typically largely successful entrepreneurs themselves. This means that unlike most personal investors, they have a pretty good or better understanding of your business plan, and invest either one-time or gradually over time.
Now a standard alternative to more traditional forms of financing like banks, startups usually approach angel investors when they are at or beyond the seed stages of financing but not quite ready for larger investments. As their roles vary, an added bonus for startups here is the ability of some angel investors to serve as mentors and advisors, as well as to leverage their connections.
These are best described as a subset of angel investors who band together. The advantage of angel groups are combined resources, which allow them to find bigger deals and enjoy lower exposure to risk.
Peer-to-peer lenders are among the less known types of investors. There are companies that specialize in P2P lending, whereas someone in need of funding applies for a credit. If approved, they receive an interest rate of the loan (depending on their risk category), which a third party investor funds.
With peer-to-peer lending, both sides get a good deal. The borrower (a startup, in this case) gets a better interest rate compared to what they’d get with a classic bank loan or credit card, while the peer-to-peer lender earns a higher return this way than through, say, a savings account.
Accelerators and incubators
Both are investment companies that help startups develop early in their cycle with different frameworks. Both are great opportunities early on to quickly grow but also attract other investors – so what’s the difference?
Accelerators focus on existing business and scaling it (business building) within a shorter timeframe than normal. They do so by providing access to a large network of mentorship and education (apart from financing), which is arguably the biggest asset here.
On the other hand, incubators are generally centered on innovation. They provide more on the logistics side such as office spaces and specific management training to refine the startup’s idea, craft its business plan, and every little thing necessary to succeed in the startup ecosystem – essentially build out a business model and company.
An inevitable part of almost every investment conversation, venture capitalists are considered the next level in startup funding due to substantial amounts of money invested. They usually invest in startups that have already displayed a certain level of success (e.g. revenue) and do so more likely in later funding rounds. As a result, they have a greater degree of risk tolerance.
Because these investments are larger than any other investment type, there’s more at stake for startup owners. This includes giving up partial ownership and letting venture capitalists get a say in the company’s decisions so they can maximize long-term growth potential. In return, startups also enjoy relevant VC experience and knowledge, along with considerable funding.
If venture capital firms are the next step in funding, then corporate investors are the next level in business. This is because corporations often see startups as a way to generate greater returns while also investing in order to improve their platforms or because they are otherwise aligned with corporate interests.
As with VCs, corporate investors act both as strategic financial investors and a treasure trove of resources in the form of introductions to potential clients, other businesses within the parent company, and a plethora of industry-specific insights.
Then there are the likes of those that don’t conform to any of the types of investors outlined above. M51 is one such example: a non-VC investment company that offers both funding and network of support (technology to scale, legal help, industry expertise, etc.) for startups to succeed.
One investment can change everything
All it takes is one investment for a startup to get going and change everything – for better or worse. While all investors roughly have the same end goal, they are far from created equal. Don’t accept an investment from any investor – do your due diligence and collaborate only with those that will bring value to both sides.
The most important thing to remember here is that an investment is a long-term relationship and as such, you should treat it with utmost care. The level and quality of an investor’s participation can ultimately steer your startup toward success or failure.